Question
If there is an increase in the price of apples that causes consumers to purchase fewer pounds of apples and more pounds of oranges, the CPI will suffer from
a. substitution bias.
b. bias due to the introduction of new goods.
c. bias due to unmeasured quality change.
d. base-year bias.
e. none of the above.
a. substitution bias.
b. bias due to the introduction of new goods.
c. bias due to unmeasured quality change.
d. base-year bias.
e. none of the above.
Answers
GPT-4o mini
The correct answer is **a. substitution bias.**
Substitution bias occurs when the Consumer Price Index (CPI) does not account for consumers changing their purchasing habits in response to changes in prices. In this case, as the price of apples increases, consumers buy fewer apples and substitute them with more oranges. This behavior is not reflected in the CPI, which may overstate the cost of living by not capturing the shifts in consumption patterns.
Substitution bias occurs when the Consumer Price Index (CPI) does not account for consumers changing their purchasing habits in response to changes in prices. In this case, as the price of apples increases, consumers buy fewer apples and substitute them with more oranges. This behavior is not reflected in the CPI, which may overstate the cost of living by not capturing the shifts in consumption patterns.